Board baulks for more dollar and housing clarity

The Reserve Bank left interest rates unchanged, but signaled yet again its ongoing propensity to deliver yet another interest rate cut if circumstances permit.

In what was a short statement from Governor Glenn Stevens, the bank judged the global economy to be “running a little below average this year” with economic growth in Australia “a bit below trend”.

The worry is that “a little” becomes a lot.

While there was nothing terribly new or controversial from the Reserve Bank statement, the most notable aspect of its economic update was a judgment that the Australian dollar “remains high considering the decline in export prices that has taken place over the past year and a half”.

This is not such a complex code for its ongoing concern that the local currency is overvalued, despite the recent dip from around US$1.05 to US$0.97 or so.

If the Australian dollar remains around current levels, let alone rebounds, expect the Reserve Bank to step up with a further rate cut as it works to offset the contractionary and disinflation effects of the dollar.

A stark absence was any mention of house prices, even though there has been a marked 2 per cent fall in prices in the last two months. This is odd as rising house prices in the six or so months up to March were often reasons cited by the board for its tardiness in cutting rates.

Perhaps this is the issue that leads the bank to the conclusion that “the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand”.

A sharp house price fall would be bad news indeed.

The good news from a medium term economic perspective is that monetary policy is already quite easy. Not only is the cash rate at a record low of 2.75 per cent, but mortgage interest rates are just over 6.01 per cent (most actually pay substantially less given the competitive pressures in the mortgage market) and business interest rates are at levels rarely seen in the last 30 years.

Governor Stevens noted: “The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values. Further effects can be expected over time.”

The end-game remains that at least one more rate cut will be required sometime in the near future to lock in this positive outlook for the economy.